Obama threatens to veto tax-break bill, deepening rift among Democrats 

President Barack Obama’s threatened veto of a $400 billion-plus tax-break bill exposed a widening fault line within the Democratic Party.

Negotiators from both parties, including Senate Majority Leader Harry Reid, were preparing to exclude a pair of Obama’s top priorities from a year-end agreement. The plan would lock in permanent extensions of tax breaks for corporations, college students and residents of states without income taxes while not making permanent breaks for low-income families.

Obama objected and responded in an unusual way yesterday. The White House issued a veto threat before lawmakers released the plan publicly, siding with progressive groups and advocates for a lower budget deficit over his own party’s Senate leaders.

“The president would veto the proposed deal because it would provide permanent tax breaks to help well-connected corporations while neglecting working families,” Jen Friedman, a White House spokeswoman, said in an e-mail yesterday.

The Democrats’ intraparty feud on policy and strategy has intensified and become more public since the Nov. 4 election, when Democrats lost control of the Senate.

The White House’s threat came on the same day that New York Senator Charles Schumer gave a speech saying Democrats made a mistake by passing Obama’s health-care law in 2010, when they controlled both chambers of Congress, instead of focusing more directly on helping the middle class.

Agreement Uncertain

The veto threat threw the tax talks into uncertainty just as they appeared near a conclusion.

Democratic infighting between Reid and Senate Finance Chairman Ron Wyden and between Senate Democrats and the White House made it hard to reach a final deal, said a Republican aide close to the negotiations.

The talks are in limbo now so Senate Democrats and the White House have a chance to get on the same page, said the Republican aide, who asked for anonymity to discuss the talks. It’s not clear what set of policies would satisfy Senate Democrats and Obama, the aide said.

The deal that was almost done would take dozens of tax breaks that expired at the end of 2013 and extend them through 2015. A few breaks would become permanent law, including the research tax credit for businesses, a handful of provisions for charities, the deduction for state sales taxes and a break for mass-transit users.

It wouldn’t address expansions of the child tax credit and earned income tax credit that are scheduled to expire at the end of 2017. Letting those breaks expire would hurt more than 16 million people, including almost 8 million children, according to the Center on Budget and Policy Priorities, a Washington group that advocates for low-income families.

The emerging deal had appeal for some Senate Democrats. For starters, it would forestall Republicans’ backup plan – a bill that would extend the lapsed breaks only through Dec. 31, 2014.

Wind Energy

Republicans take over the Senate in January, giving them more control over the agenda and greater ability to pick and choose which of dozens of breaks survive. Democrats are concerned over the fate of the production tax credit for wind energy, which may fall victim to Republican opposition with only a short-term deal.

Under the bipartisan framework, the wind credit would have gotten a multiyear phaseout before expiring Oct. 1, 2017, the Republican aide said.

Revamping Taxes

The veto threat shows that the White House has calculated that an extenders agreement now – regardless of the merits – would make it harder for the administration to negotiate a revamp of the tax code with Republicans when that party controls the Senate, said a Senate Democratic staff member, who requested anonymity to discuss the matter.

The deal also would make permanent specific provisions backed by Senate Democratic leaders.

Reid, a Nevada Democrat, wants to lock in the deductibility of state sales taxes, an important issue in his home state, which lacks an income tax. In that state 22 percent of tax filers take advantage of the break, the second-highest percentage in the U.S., according to the Pew Charitable Trusts.

The extension of the mass-transit break is a top priority for Schumer, who represents New York. He’s also been a long-time backer of a tuition tax credit. Like Obama’s priorities, that break is scheduled to lapse at the end of 2017.

The potential deal could also have included two bipartisan agreements alongside the tax breaks, the Republican aide said. Those are a deal to exempt some health-insurance policies used by U.S. workers overseas from certain Obamacare rules and an agreement backed by dredgers and grain shippers to increase inland waterways fees.

Congress Returns

The veto threat automatically alters lawmakers’ calculations on the deal. Congress returns to Washington Dec. 1 and lawmakers plan to adjourn by Dec. 11.

That gives them little time to reach agreement and overcome days of potential procedural obstacles in Congress. The Internal Revenue Service is warning that the longer Congress takes to finish a plan, the longer tax refunds may be delayed in January.

By issuing the veto threat now instead of in December, Obama can buy time for Congress to create a new proposal that would be more acceptable to him or call his bluff and try to pass it over his objections.

Overriding a veto would require two-thirds of the lawmakers in the House and Senate, a high barrier for a deal that is already drawing opposition from Democrats. Early opponents include Representatives Chris Van Hollen of Maryland and Sander Levin of Michigan and Senators Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts.

‘Massive Handout’

“Millions of people are still struggling to recover from the financial crisis, but this deal would give a massive handout to big corporations and expect working families to pick up the tab,” Warren said in a statement. “Congress should be helping these families, not rewarding corporate lobbyists and their wealthy clients.”

Corporations, led by groups such as the Business Roundtable and the National Association of Manufacturers, have been lobbying for the tax-break extensions.

“Failure to extend these provisions is a tax increase,” more than 500 business groups wrote to lawmakers Nov. 18. “It will inject instability and uncertainty into the economy and weaken confidence in the employment marketplace.”

Companies with breaks at stake in the talks include General Electric Co., Citigroup Inc. and Wal-Mart Stores Inc.

The biggest beneficiaries of the breaks would include corporations that conduct research, residents of states such as Washington and Texas that lack an income tax, and wind-energy producers concerned that their tax benefit would end all at once instead of being phased out. Tax breaks for low-income families that lapse at the end of 2017 wouldn’t be extended.

Senate Democrats

Obama’s rejection of talks involving Senate Democrats shows tension in the relationship between the president and some parts of his party in Congress, particularly Reid.

“I have no idea what is going on here,” said Jim Manley, a former aide to Reid. “The idea that the White House would be willing to threaten a veto like this before a deal is even announced is very unusual.”

Under the emerging deal, the tax break for corporate research would be expanded and made permanent, benefiting companies such as Intel Corp. and Johnson & Johnson. A benefit that lets small businesses write off investments more quickly also would be locked in.

Conservation Easements

Obama’s budget calls for permanent versions of both of those business tax provisions. Administration officials routinely say that budget proposals can’t necessarily be seen in isolation from other portions of the budget, including tax increases.

Other breaks that may be made permanent include incentives for landowners to donate conservation easements and for individuals to make charitable donations directly from tax-advantaged retirement accounts.

Dozens of other tax breaks that expired at the end of 2013 would be continued through 2015. Among those that have lapsed are a provision that lets home sellers exclude from income the forgiven debt from short sales, as well as accelerated depreciation for motorsports tracks.